WEALTH HEALTH: It’s a bull market for bearish forecasts

It’s hard not to be interested in the market calls of experts, but it’s not necessarily profitable, especially when the projections are more extreme.

Chuck JaffeFor The Patriot Ledger

The market is about to crash! Now that I have your attention, I can tell you why you should ignore alarmist headlines (and statements) like that one.

It’s not that crashes and downturns have been rescinded by a five-year bull market, it’s that what should matter the most to a long-term investor is the economy over the market, and the long-term trend instead of what’s happening now.

It’s hard not to be interested in the market calls of experts, but it’s not necessarily profitable, especially when the projections are more extreme.

And yet average investors can’t help themselves from looking at anything that screams coming doom or that forecasts Armageddon, or that predicts a coming situation where it’s possible to get rich quick.

It’s a bit like rubber-necking at a car accident, a situation where most people will tell you that they don’t want to slow down and look, but yet that’s exactly what they do as they pull up on the scene.

Average investors don’t “follow” gurus, soothsayers, clairvoyants and stock jockeys. They set up a portfolio and stick to the path – for at least the bulk of their assets – no matter what is happening on Wall Street or with the economy.

When those headlines, statements and sound bites catch their attention, however, they watch and listen, and wonder “What if?”

Richard Peterson of MarketPsych Data noted that investors are attracted to gloom-and-doom – like rubber-necking – by instinct. “We want to learn from others’ misfortunes so we don’t have them happen to us,” he said.

The fortune-tellers, meanwhile, not only recognize those human instincts, but they know that the more outrageous the prediction, the more attention they get. They can highlight any forecasts they get right, knowing that their misfires are forgotten quickly. Thus, calamity and catastrophe sells.

Right now, it’s a bull market for bearish forecasts.

The investors who fall for that stuff, however, can do permanent damage to their portfolio.

Part of the problem is that long-term investors are taking their eyes off the prize when they focus on the market rather than the economy.

“Long-term investors should think about the economy and the prospects of U.S. and foreign companies they invest in. They should not focus on the market,” said behavioral finance expert Terrance Odean, a professor at the Haas School of Business at the University of California-Berkeley. “In the long run, what matters if whether the economy prospers and firms earn profits.

“Yes, there are times when companies can be bought at higher or lower prices relative to earnings, but timing the market is difficult and most individuals get it wrong. Rather than asking themselves ‘Is this the right moment to buy stocks,’ investors should ask themselves if they are willing to invest long-term in the U.S. or world economy, and maybe consider that there are few other long-term alternatives.”

None of this is to suggest that investors should ignore the possibility that the market is due for a correction or a crash. For a long-term investor, trouble is unavoidable.

Disaster preparation, however, comes in the planning stages, rather than in knee-jerk reactions.

Since it’s hard to suggest there’s a downturn or crisis in place now – even with a market that has been volatile but flat year-to-date, it will be awhile before the buzz of last year’s 30 percent gains fades – you can rest assured that trouble has not been repealed and that tough times are coming, even if it is later rather than sooner.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com. CLICK to read more of his columns.
The interesting thing compounding the current situation – and the fascination with the calls for a market collapse – is that there are plenty of experts who feel the bull will keep on running for several more years. Arguing experts – instead of having most prognosticators agree – increases investors’ anxiety.

“All the street investor can see is disagreement among what appear to be experts, and expert uncertainty and disagreement is one of the key factors by which people perceive or gauge risk,” said Donald MacGregor of MacGregor-Bates, a consumer/investor research firm.

“The pathway forward is to have a personal financial strategy that creates diversification, and a time horizon for investment that is concrete and to which one will hold,” he added.

For everyone else, however, the course of action despite the titillating headlines is simple: “Become a discriminating and educated investor and stay away from toxic talk,” MacGregor said. “It can be hazardous to your financial health.”